If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Highlight Communications (ETR:HLG), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Highlight Communications:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.035 = CHF7.2m ÷ (CHF641m - CHF436m) (Based on the trailing twelve months to June 2024).

Thus, Highlight Communications has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 13%.

Check out our latest analysis for Highlight Communications

Above you can see how the current ROCE for Highlight Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Highlight Communications for free.

What Does the ROCE Trend For Highlight Communications Tell Us?

The trend of ROCE at Highlight Communications is showing some signs of weakness. The company used to generate 4.5% on its capital five years ago but it has since fallen noticeably. In addition to that, Highlight Communications is now employing 29% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Highlight Communications' current liabilities have increased over the last five years to 68% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Highlight Communications' ROCE

In summary, it's unfortunate that Highlight Communications is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 77% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Highlight Communications does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Highlight Communications isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.